As this Law Now goes to issue, it still remains to be seen if a “Grexit” will result or if the relevant bodies and politicians can agree a last minute process to avoid this happening.
The events of the last few days and in particular over the weekend have brought into sharp focus the risks and uncertainties that the market is likely to face if Grexit results- we highlight those issues and risks immediately arising in this Law Now.
The London Market Association (“LMA”) and HM Treasury during the past week have both issued reminder bulletins and guidance as the spectre of Grexit has loomed larger and larger.
In its bulletin issued 25 June 2015, the LMA reminded its Lloyd’s managing agents of guidance and specifically the model clauses issued by the LMA in 2012 when Eurozone issues were significantly to the fore. As the LMA reminded, that guidance highlighted issues over the settlement of premiums and claims where a country changed its currency; the desirability of using and including in policies “contract continuity clauses” to ensure certainty of contract in the event of a Eurozone exit; and the impact generally on insurance contracts in the event that one or more countries exit the Eurozone. Brokers and managing agents should remain vigilant to take the necessary steps to minimise risks to insurers and policyholders’ interests in the event of an exit.
HM Treasury also issued a notice on 29 June 2015, following the temporary capital control measures put in place by the Greek government to limit the movement of currency, reminding that: payments originating from Greece may be delayed; Greek companies may have difficulties making payments/deliveries; that cash flow issues involving Greek businesses may arise.
Payments from Greek financial institutions are currently suspended until 6 July 2015, pending the outcome of the referendum on 5 July. However, without an imminent significant political intervention, it currently appears inevitable that such restrictions are likely to continue to some point past the contemplated referendum.
If “Grexit” happens, some issues and risks for the insurance market appear likely even at this stage:
Practical impact on insurance policies issued in Euros to Greek insureds
Many obligations may remain in Euros, yet others may become subject to new Drachma - but that may be wholly dependent on which court is asked to rule and determine the issue. One can reasonably suppose that policies expressed to be governed by Greek law will be determined by Greek courts as having new Drachma applied; yet policies placed in the international market, considered by non-Greek courts, may well have Euro obligations affirmed.
- If New Drachma is applied, what conversion rates are then to be applied to convert sums that may be ordered to be paid?
- Do claims payments get made in new Drachma or Euros?
- And if now to be paid in new Drachma, will that not create a value expectation mismatch for the insured?
- If an English court gave a judgment in an existing international currency, and there was the new Drachma, what market exchange rate would be applied – just how would an English court calculate the amount to be paid?
With the value of any new currency likely to drop rapidly against the Euro, practically, the risk of premium payment default will rise; both insureds and insurers may wish then to explore whether they can terminate the pre-Grexit placed contractual arrangements. For those who have the benefit or proposed benefit of group worldwide insurance policies, there may be a materially increased cost of settling the premium payable for Greek jurisdiction cover if that has to be paid in new Drachma and if that currency has, as is expected, significantly depreciated in value compared to the Euro.
For those reinsurance contracts governed by English law and jurisdiction that cover underlying Greek risks, one can expect to have a reinsurance premium payable in Euro (or other international currency) - but the Grexit then presents the scenario that underlying premiums and policy obligations will become payable in new Drachma - a currency clash where, again, none existed.
Greek insurers’ assets/reserves:
These can be expected to be valued in, and converted to, new Drachma sums - with depreciation in value against the Euro inevitable, the value of assets is, once more, suddenly reduced against liabilities that are expressed in Euro and which will remain. Solvency challenges arise. Similar challenges will arise for those non Greek insurers who are similarly holding Greek assets. It would appear that insurers’ exposures become dependent on the make-up and location of its asset base.
Coverage availability; claims incidence:
Many well-known products will likely become unavailable for Greek based risks e.g. political risk, currency coverage and trade credit; indeed in the context of trade credit insurance, it is understood that certain insurers have already suspended cover for shipments to Greece due to the Grexit risk. Solvency challenges and commercial inability to deal with liabilities in the ordinary course of business promote claims and, in particular, claims against financial institutions; Grexit is particularly bad news for those insuring financial institutions or who issue D&O policies.
As an EU Member State, Greek insurers are admitted carriers. In the event of a potential withdrawal from the EU, and its regulations, the continued position of Greek insurers as admitted carriers may be put under the spotlight.